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The first is that the route recommended by us would allow work to start at the beginning of next year. cut 10 months off the programme outlined as an attachment to your
This would letter and the resulting savings in cost at present rates of inflation are too obvious to labour.
The second is that we are in a period of high interest rates throughout the world which seem unlikely to be reversed in the foreseeable future. It is therefore unlikely that the export finance rate of 6% per annum can be held indefinitely under these conditions. If the second path is followed and a Letter of Intent issued in the near future, it should be possible to secure that rate for the following 18 years. The cumulative cost savings of say a 1% differential in the rate over this period of time are very substantial indeed at least HK$300 million.
The main bogey for a job with a construction period as long as this one is normally that of inflation and its effect upon the cost and viability of the project. Both G.E.C. and the Civil Consortium have explained to you their position in relation to escalation.
As far as the viability of the project is concerned the effect of inflation on the capital cost must be related to the subsequent effect of inflation on the revenue from the operation of the system. Since the effect of inflation applies to the capital cost for a limited period only, whereas its effect on the fare structure will continue as long as the trains are running, any resulting escalation in the capital cost would be more than off-set by the escalation of revenue. The tables which we submitted to you at our last meeting in Hong Kong graphically illustrated this point by showing that the higher the annual rate of inflation applied to capital cost, recurrent expenditure and revenue, the quicker the loans are repaid.
It may be argued that although this theory can't be denied as far as inflation in Hong Kong is concerned, one could have a situation in which the rate of inflation was running at a higher rate in the U.K. than in Hong Kong.
If this situation were to continue for any appreciable length of time, there is little doubt that sterling would depreciate in terms of the Hong Kong dollar. This would mean in turn that the U.K. content of the contract would become cheaper in the context of Hong Kong prices and the inflation factor would be off-set.
I have mentioned revenue and its natural role as the killer of the bogey of inflation. I appreciate that there are political as well as commercial factors involved in decisions upon fare structures. Nevertheless from the schedules that we have prepared for you over the last year, it seems to us that the projections of revenue must have been very pessimistic indeed for you